Never mind the balance sheet The dangers posed by public-private partnerships in central and eastern Europe Research and writing Fidanka Bacheva-McGrath, CEE Bankwatch Network Eliska Cisarova, Transparency International – Czech Republic Akos Eger, National Society of Conservationists Hungary/CEE Bankwatch Network Pippa Gallop, CEE Bankwatch Network Zvezdan Kalmar, Center for Ecology and Sustainable Development, Serbia Vera Ponomareva, Save Yuntolovo Public Environmental Movement, Russia Acknowledgements Alda Ozola, Latvian Green Movement/CEE Bankwatch Network Andrzej Gula, CEE Bankwatch Network Anelia Stefanova, CEE Bankwatch Network Anna Roggenbuck, CEE Bankwatch Network David Hall, Public Services International Research Unit, UK Ivaylo Hlebarov, Za Zemiata/CEE Bankwatch Network Klara Sikorova, CEE Bankwatch Network David Price, Centre for International Public Health Policy, University of Edinburgh Roman Havlicek, Friends of the Earth - CEPA, Slovakia/CEE Bankwatch Network Editing Greig Aitken Design Andrea Hruskova, www.adisha.eu Printing Grafokon, s.r.o., www.grafokon.cz Cover photo Jan Prenosil, www.fixca.info/ Attribution-NonCommercial-NoDerivs, www. creativecommons.org CEE Bankwatch Network gratefully acknowledges financial support from the International Visegrad Fund and the European Commission (DG Environment). Sole responsibility for content lies with the authors of the report. Funders cannot be held responsible for any further use that may be made of the information contained therein. Contents FOREWORD 4 EXECUTIVE SUMMARY 6 INTRODUCTION 8 What is a PPP? 9 Reasons for using PPPs 10 Overview of PPPs in central and eastern Europe 11 Snapshot of IFI involvement in PPPs 12 CONCERNS ABOUT PPPS 15 Build now, pay heavily later 15 Project planning problems 16 Value for money? 18 Efficiency through competition? 20 Efficiency through meeting deadlines? 21 Public services: Cutting costs or cutting corners? 21 Efficiency through risk transfer? 24 Excess profits through refinancing 25 WORKING FOR WHOSE GOOD? THE ROLE OF THE IFIS IN PPPS 26 PPP CASE STUDIES IN CENTRAL AND EASTERN EUROPE 30 Case study: Trakia Highway, Bulgaria 30 Case study: Zagreb wastewater treatment plant, Croatia 32 Case study: Motorway toll collection system, Czech Republic 36 Case study: National Palace of Arts, Hungary 40 Case study: Saint Petersburg Western High Speed Diameter, Russia 42 Case study: Horgos-Pozega highway, Serbia 45 CONCLUSIONS AND RECOMMENDATIONS 47 ANNEX 1: TABLES OF EBRD PPP INVESTMENTS 51 NOTES 54 Foreword “The reality is that PFI, or “public private partnership” headlines, many more PPP projects have proven to be as the government now prefers to call it, is a scam. (...) poor value for money for CEE taxpayers. At the same Far from introducing market disciplines, it has become an time, the long-term cumulative impact of PPPs on public official licence to fleece the taxpayer. Far from reducing budgets has hardly been discussed at all. the public sector borrowing requirement, PFI is, as the Accounting Standards Board has noted, simply an “an The financial crisis should serve as an alarm call about the off-balance sheet fiddle”. Most alarmingly, the ministers I perils of taking on long-term inflexible budget burdens, have spoken to simply do not understand how it works.”1 and indeed the increased difficulties in obtaining loans George Monbiot, UK author and investigative journalist. are likely to slow down infrastructure projects. However, ‘build now, pay later’ might seem increasingly alluring to Encouraged by consultancy companies, think-tanks cash-strapped governments reluctant to give up their and international financial institutions (IFIs), more and infrastructure plans. more countries in central and eastern Europe (CEE) are undertaking public infrastructure projects using public- Public debate on this issue is seriously hampered both by private partnership (PPP) arrangements. the secrecy surrounding PPP deals and by the perception that the issue is complicated and tedious. Yet the debate Most recently, European Commission president Jose about PPPs is too important to be left to ‘experts’, who Manuel Barroso has commented on how the European have too often not ensured that the taxpayer receives Commission plans to tackle the economic crisis, citing good value for money in PPP projects and who often have a package of measures that includes the “need to find a direct interest in promoting PPPs. innovative funding for a wide range of transport, energy and high technology networks which can provide jobs CEE Bankwatch Network, as a public interest group in the short-term and also contribute to sustainable monitoring the investments of the IFIs, is concerned growth in the long-term. A better use of public-private at the increasing number of poor value for money PPP partnerships is one way forward.” 2 projects in CEE, and at the planned spread of PPPs to Russia and Central Asia. In particular the fact that IFIs If these remarks signal a need for a qualitative have not succeeded in ensuring value for money in some improvement in PPPs rather than simply a quantitative of the projects they have financed is of great concern, hike in the number of them, then it is not before time – the given that they are public banks that ought to work experience with PPPs so far has not been encouraging. in the public interest. The IFIs should be instrumental While a few obvious failures such as the M1/M15 in ensuring the sustainability of government spending motorway in Hungary, the Trakia Highway in Bulgaria commitments as well as transparency and value for and the Horgos-Pozega motorway in Serbia have hit the money in individual projects. CEE Bankwatch Network, November 2008 This report sets out to provide CEE public interest groups, The UK experience shows that although CEE countries such as environmental, consumer and transparency face particular problems in infrastructure development, NGOs and trade unions, with an easily understandable such as incoherent planning, corruption, lack of guide to the issues surrounding PPPs in the region. It transparency and public participation, as well as an aims to demystify the claims made in favour of PPPs excessive penchant for prestige projects, these problems and enable wider public engagement on the topic. Public still exist in PPPs in more established democracies, albeit authorities need to learn from previous mistakes, and sometimes in different forms. It cannot therefore be close scrutiny by civil society organisations is necessary assumed that these problems will be ironed out within to ensure that any projects undertaken via the PPP a few years in CEE. model do in fact represent good value for public money. Instead the use of PPPs in infrastructure needs to Case studies from a variety of CEE countries are be seriously reviewed, but this will only happen with presented, showing the issues that have arisen to greater public pressure on decision-makers. It is hoped date with PPP projects. However since the number and that this study will contribute to greater debate taking variety of PPPs in the region has been limited so far and place. has particularly focused on motorways, the study also presents evidence from the UK – the world ‘leader’ in PPPs – where, amidst great controversy, hundreds of PPP projects have been implemented in various sectors in the last two decades. Never mind the balance sheet Executive summary In recent years public-private partnerships (PPPs) In addition, new international accounting guidelines have been heavily promoted in central and eastern will move most PPPs back onto public balance sheets in Europe (CEE), often giving the impression that where countries which decide to align their national accounts infrastructure is concerned, PPPs are the only game in with the guidelines, thus removing their main attraction. town. Yet behind the plethora of conferences, workshops Thus far in CEE criticisms have focused on identified and publications, few CEE countries have implemented problems with individual projects, but the impacts of more than two or three PPP projects, and even fewer PPPs on public budgets needs to be examined much truly successful projects. more closely. Discussion on the topic in CEE has mainly been limited The other main justification for PPPs has been the idea to technical discussions about how to best implement that the private sector is more efficient at construction PPPs rather than about whether to implement them at and providing services, but more and more evidence is all. In contrast PPPs have been fiercely criticised in their emerging that many of the claims made for PPPs are birthplace the UK, raising the question of whether the false or based on questionable assumptions. CEE countries are in danger of rushing headlong into a discredited policy. In particular, the claim that construction through PPP is much more likely than publicly procured construction to This report aims to open the debate by presenting be completed on time and on budget is frequently cited, CEE Bankwatch Network’s concerns about PPPs and yet the evidence presented is unfounded. Calculations examining under what – if any – circumstances PPPs to compare the costs of a PPP with public procurement could make a useful contribution in CEE. – where they take place at all – have often been biased in favour of PPPs. PPPs can be problematic at the individual project level and due to their cumulative impacts on public budgets. The extra costs of PPPs have sometimes been justified The main motivation